Fund managers remain bullish about the long-term prospects of the leading US technology stocks despite a number of analysts lowering their earnings for the popular stocks, which begin their reporting this week.
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
Facebook, Amazon, Apple, Netflix and Google parent Alphabet - known as the FAANGs - have been sold off in recent months as a rising US dollar and Treasuries prompted investors to rotate into energy and bank stocks.
The sell-off coincides with analysts cutting their earnings estimates on the top five by an average of 1.4 per cent over the past two months, while expectations for the S&P500 are broadly higher, data compiled by Bloomberg shows.
The colourful tech companies haven't managed to shake the notion they are overvalued; they are still trading at an average 74 times earnings, almost three times that of the S&P500.
But fund managers point to their robust earnings as cause for FAANG's continued outperformance, with income forecast to expand by a robust 18 per cent on average this year, almost twice that of the entire S&P500.
"Their future earnings are still impeccable and the market is acknowledging this," says Timothy Samway, managing director at Hyperion Asset Management.
"Daily machinations aren't that interesting, this sector is a long-term earnings story."
Amazon and Google
Amazon and Google are both due to report on Thursday, with analysts scratching their heads over how to include the financial impact of Amazon's Whole Foods acquisition.
"One challenge going forward will likely be limited disclosure of Whole Food's financial impact," says Mark Mahaney, an analyst at RBC Capital Markets
In August, Amazon paid $US13.7 billion to acquire Whole Foods, and almost immediately began dropping grocery shelf prices.
"But the big picture remains clear," says Mr Mahaney, who sees Amazon easily outstripping any competitors. "Amazon's two key end markets, retail and cloud, are still only 10-15 per cent penetrated.
"Further, Amazon's execution has been consistently excellent and it remains arguably the single best play off the biggest trends today, those being cloud, artificial intelligence and voice-activated internet."
Despite the European Union levelling a $US2.7 billion fine at Google in June, the growth of Alphabet's mobile search and YouTube features are likely to underpin strong earnings, says JP Morgan.
"Google continues to grow very fast off a large base, and we believe there is considerable headroom for both mobile search and YouTube over time," analyst Doug Anmuth wrote in a note to clients.
Facebook has been one of the best performing of the FAANG stocks this year, and some analysts are certain there is still further to go thanks to the company's new video ad offerings.
"We expect Facebook to post strong 3Q results ... driven by improvement in monetisation and user growth across both Facebook and Instagram," wrote Youssef Squali, an analyst at SunTrust Robinson Humphrey.
Regulatory intervention still risk
As the FAANG stocks grow even larger and their reach permeates more global markets, the risk of government intervention keeps fund managers watching.
Facebook is currently embroiled in investigations into its involvement with Russia during last year's US presidential election and US President Donald Trump has openly attacked Amazon for hurting other retailers.
"We are sensitive to the long-term future of these businesses and how they are regulated," said Mr Samway. "But a lot of what's going on globally is already reflected in the price."
